InequalityInequality and Economic Growth: Do Natural Resources Matter?

Thorvaldur Gylfasonand Gylfi Zoega

Sources of GrowthSources of Growth

In ves tm en t X E d u ca tion

G row th+ +

?

Endogenous growth: X can be almost anything!

Arthur Lewis: X is trade, stable politics, good weather

Sources of Sources of GrowthGrowth

In ves tm en t

In it ia l In com e N atu ra l C ap ita l

X E d u ca tion

G row th+

+

+–– ?

Dutch disease

Rent seeking

––

Natural capital crowds

Natural capital crowds

out out humanhuman and and physicalphysical

capitalcapital

Conditional Conditional

convergence

convergence

Recent LiteratureRecent LiteratureFive main linkages:

1. Dutch disease Adversely affects level, composition, or

volatility of trade and investment

2. Rent seeking Protectionism, corruption

3. Education4. False sense of security

Poor quality of policies and institutions

5. Investment

But Norway is,

so far at least,

an exceptionForeign Foreign

capitalcapital

Social Social

capitalcapital

Human Human

capitalcapital

PhysicaPhysica

l l capitalcapital

Natural capital Natural capital tends to crowd tends to crowd outout

Natural Resource Abundance versus Dependence

Resource poor,resource dependent

(Chad, Mali)

Resource rich,resource dependent

(OPEC)

Resource rich,resource free(Canada, USA)

Resource poor,resource free

(Jordan, Panama)

Reso

urc

e d

ep

en

den

ceR

eso

urc

e d

ep

end

ence

Resource abundanceResource abundance

Dependence hurts growth, even if abundance may help

Hypothesis:

InequalityInequality and Growth and Growth

In ves tm en t

In it ia l In com e N atu ra l C ap ita l

In eq u a lity E d u ca tion

G row th

+

+

+–––

–

–

+–

Inequality and growth are both endogenous, and depend on natural resources

X = inequality

TheoryTheory Two sectors

Primary sector with unequal distribution of earnings

Manufacturing sector with opportunities for learning and innovation

Large primary sector meansGreater inequalitySlower economic growth

Explore relationship between natural resource intensity, inequality, and economic growthinequality, and economic growth across countries since 1965

Hypothesis:Hypothesis: Natural resource Natural resource dependence hurts growthdependence hurts growth through increased inequality, inter alia

Study 87 industrial and developing countries from 1965 to 1998

Empirical AnalysisEmpirical Analysis

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70

Gini index for income (various years)

Gin

i in

dex f

or

lan

d (

vari

ou

s y

ears

)

Distribution of Distribution of Income and Land Income and Land

45

Land is less equally distributed than income

r = 0.57

r = rank correlation

50 countries

Inequality and Natural Capital

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60

Share of natural capital in national wealth 1994 (%)

Gin

i in

dex

of

ineq

ual

ity

Increase in natural capital by 3% of national wealth goes along with an increase in Gini by 1 point.

7 African countries where saving is 5% of GDP

and per capita growth is -1% per year

Notice Notice

clustercluster

Increased natural

resource

dependence goes

along with increased

inequality

r = 0.41

75 countries

Inequality of access to education and land: Same pattern

Natural Capital and Economic Growth

85 countries85 countries

What is the empirical evidence?

-8

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60

Share of natural capital in national wealth 1994 (%)

Per

cap

ita g

row

th 1

965-9

8, ad

juste

d f

or

init

ial

inco

me (

% p

er

year)

An increase in the natural capital share by 8% goes along with a decrease in per capita growth by 1% per year.

r = -0.64

8 African countriesS/Y = 0.05

8 Asian countriesS/Y = 0.32

Notice two Notice two

clustersclusters

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60 70

Gini index of inequality

Per

cap

ita

gro

wth

196

5-98

, ad

just

ed f

or

init

ial

inco

me

(% p

er y

ear)

An increase in Gini index by 12 points goes along with a decrease in per capita growth by almost 1% per year

r = -0.50

Growth and Inequality, 1965-98

What

do the

data

say?

Sweden South Africa

France

Brazil

No No discernibldiscernible sign e sign that that equality equality stands in stands in the way the way of of economic economic growthgrowth

Korea

75 countries

Sierra Leone

One Possible One Possible InterpretationInterpretation

Inequality

Resources

Growth

Inequality

Growth

+ =Resources

Another Possible Another Possible InterpretationInterpretation

Inequality

Resources

Growth

Resources

Growth

+ =Inequality

Education and Education and Inequality:Inequality: Another Another Link? Link?

Now consider the relationship between inequality and threethree different measures of education inputs, outcomes, and participation:1. Public expenditure on education2. Expected years of schooling for

girls3. Secondary-school enrolment

Secondary Enrolment and Inequality

75 countries75 countries

0

10

20

30

40

50

60

70

0 20 40 60 80 100 120

Secondary-school enrolment 1980-97 (%)

Gin

i in

dex o

f in

co

me in

eq

uality

An increase in the secondary-school enrolment rate by five percentage point goes along with a decrease of almost one point on the Gini scale.

r = -0.54

Expenditure on education and years of schooling: Same pattern

Secondary Enrolment and Growth

-8

-6

-4

-2

0

2

4

6

0 20 40 60 80 100 120

Secondary-school enrolment 1980-97 (%)

Per

cap

ita

gro

wth

196

5-98

, ad

just

ed f

or

init

ial i

nco

me

(% p

er y

ear)

Positive but diminishing returns to education

An 25 point increase in secondary-school enrolment goes along with an increase in per capita growth by 1% per year.

r = 0.72

87 countries

One Possible One Possible InterpretationInterpretation

Growth

Education

Growth

Inequality

Inequality

+ =Education

Another Possible Another Possible InterpretationInterpretation

Growth

Inequality

Growth

Education

InequalityInequality

Education

+ =

0

5

10

15

20

25

30

35

40

45

0 20 40 60

Share of natural capital in national wealth 1994 (%)

Inve

stm

ent

1965

-98

(% o

f G

DP

)

Investment and Natural Capital

Increased natural resource dependence discourages investment and growth

An increase in natural capital by 5% of national wealth goes along with a reduction in investment by almost 1% of GDP.

r = -0.38

86 countries

-40

-20

0

20

40

60

80

100

120

0 20 40 60

Share of natural capital in national wealth 1994 (%)

Sec

on

dar

y-sc

ho

ol e

nro

lmen

t 19

80-9

7 (%

)

Education and Natural Capital

Increased natural resource dependence discourages education and growth

An increase in natural capital by 10% of national wealth goes along with a reduction in secondary enrolment by almost 15% of cohort.

r = -0.63

87 countries

ConclusionConclusion

DiversificationDiversification away from natural away from natural resources may spur economic resources may spur economic growthgrowth1.1. by increasing and improving by increasing and improving

human capitalhuman capital ... ... 2.2. ... as well as ... as well as social capitalsocial capital, by , by

reducing inequality ...reducing inequality ...3.3. ... and also ... and also real capitalreal capital

This may be one reason why inequality This may be one reason why inequality and growth are inversely related and growth are inversely related across countries: an equilibrium across countries: an equilibrium outcomeoutcome

ConConclusionclusion

The

End

The

EndOther possible reasonsOther possible reasons

1.1. More and better More and better educationeducation reduces reduces inequality and encourages growth inequality and encourages growth

2.2. Excessive inequality triggers Excessive inequality triggers demand for more and better demand for more and better education that reduces inequality education that reduces inequality and speeds up growthand speeds up growth

3.3. Excessive inequality reduces Excessive inequality reduces social social cohesioncohesion, efficiency, and growth , efficiency, and growth

Many possibilities!Many possibilities!

These slides can be viewed on my website: www.hi.is/~gylfason